2014 (11) TMI 182 - HC - Income Tax

Expenses incurred in earning dividend income Disallowance u/s 14A Held that - A dividend income was earned and the exemption u/s 10(34) of the Income Tax Act was claimed the Tribunal was rightly of the view that there was interest applicable on the dividend earned and only administrative expenditure was incurred and that was estimated at 5% of the dividend earned the decision in GODREJ AND BOYCE MFG. CO. LTD. Versus DEPUTY COMMISSIONER OF INCOME-TAX AND ANOTHER 2010 (8) TMI 77 - BOMBAY HIGH COURT rightly followed wherein it has been held that disallowance should be reasonable estimation of the expenditure thus, no substantial question of law arises for consideration Decided against revenue. Rejection of books of accounts opportunity of being heard not provided - Satisfaction about correctness or completeness of the Account properly recorded or not - Held that - The tribunal rightly held that before the AO records satisfaction about the correctness or completeness of the accounts of the assessee, he ought to have given proper opportunity to the assessee - The books of account could not have been rejected casually - It was not done by giving proper opportunity to the assessee - without examining the basic parameters for rejection of the books of accounts the revenue goes in appeal before the tribunal, this is what is faulted by the tribunal - the complaint of the assessee before the tribunal was wholly justified Decided against revenue.

Summary

Issues:
1. Disallowance of expenditure in earning dividend income.
2. Correctness and completeness of the accounts of the assessee under section 145 of the Income Tax Act, 1961.

Issue 1: Disallowance of Expenditure in Earning Dividend Income:
The tribunal's order referred to disallowance under section 14A of the Income Tax Act, 1961, concerning the expenditure incurred in earning dividend income. The assessing officer disallowed Rs. 1,05,670 applying Rule 8D of the Income Tax Rules, while the assessee claimed no expenditure in earning the exempted income. The tribunal found interest applicable on the dividend earned, with administrative expenditure estimated at 5% of the dividend. The court held that the tribunal correctly applied the judgment in M/s. Godrej and Boyce Manufacturing Co. vs. Deputy Commissioner of Income Tax, where disallowance should be a reasonable estimation of expenditure. Thus, the disallowance was found to be reasonable, and the judgment of the court was followed appropriately.

Issue 2: Correctness and Completeness of the Accounts of the Assessee under Section 145:
The argument revolved around section 145 of the Income Tax Act, 1961, where the Assessing Officer must record satisfaction about the correctness or completeness of the assessee's accounts. The assessing officer's finding that he was not satisfied about the correctness or completeness of the accounts of the assessee was upheld by the Commissioner of Income Tax (Appeals). However, the tribunal faulted the assessing officer for not following section 145(3) of the Act, stating that proper opportunity should have been given to the assessee before rejecting the books of account. The tribunal found the rejection of books of account to be high-handed and arbitrary. It was noted that the assessing officer made additions without sound estimation or proper examination of the basic parameters for rejection of the books of accounts. The tribunal termed the assessing officer's approach as unfortunate, arbitrary, and high-handed. Consequently, the appeal was dismissed as the assessing officer failed to record the requisite satisfaction under section 145(3), and the additions made were not based on sound estimates.

In conclusion, the High Court of Bombay dismissed the appeal as it found no substantial questions of law to interfere in its appellate jurisdiction. The court upheld the tribunal's decision on both issues, emphasizing the need for reasonable estimation of expenditure in disallowance cases and proper adherence to the provisions of section 145 for assessing the correctness and completeness of the assessee's accounts.